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Thursday, May 25, 2006

The Internal Revenue Service has been ordered by a US Tax Court Judge to repay millions of dollars in taxes, fines and interest to a group of taxpayers, after officials from the agency were found to have effectively bribed witnesses to win a tax shelter case.

The case centred on the so-called Kersting tax shelter, named after Honolulu businessman Henry Kersting, which allowed airline pilots and their families to purchase stock in one of Kersting's companies. In exchange, the pilots received promissory notes, on which they would have to pay interest, but which allowed them to claim interest deductions on their tax returns.

In the early 1980s, the IRS ruled that the Kersting tax shelter was illegal and began pursuing a number of investors who had used the scheme. Many of these eventually settled with the IRS.

However, according to Colorado Attorney Declan J. O’Donnell, who represented 100 of the 500 taxpayers who settled with the IRS, three witnesses were effectively bribed with cash, pre-paid expenses, tax settlements below par, and ten years of added tax benefits so that they would testify against six pilots.

In an opinion delivered earlier this month, the United States Tax Court stated that all of the settled cases in the Kersting Tax Shelter program should receive 64% of their monies back as a sanction.

It is perhaps the first time that such a judgment has been made against the federal tax collector, certainly for such a substantial amount of money.

"Fraud on the court is rare and has only occurred a few times in our country’s history," Mr O'Donnell observed in a statement.

"This particular ruling is the only time the IRS has ever been adjudicated with a money judgment against them. All others were either sanctioned or the cases were retried," he added.

Mr. O’Donnell believes this penalty judgment against the IRS is unique, perhaps the only large money judgment against any national taxing authority ever. His clients and the settled group will receive an estimated $56 million from the IRS in due course.

The IRS has the right to appeal the decision, but Mr O'Donnell stated that such an eventuality is remote given that interest is continuing to accrue, and that the agency cannot appeal against liability in the case.